Thoughts on Counterterrorism and Financial Fraud issues by Juval Aviv

Madoff Anniversary

Friday, December 11th , is the one year anniversary of the arrest of Bernard Madoff. While many other Ponzi schemes have been uncovered in the past year, none made such a mark on the public conscious as that one. Consequently, people have become much more careful about whom they invest with. And well they should. Greed is a big motivator and there will always be corrupt financial advisers and fraudsters who are thinking up new and inventive schemes to swindle people out of their money.

As we mark this grim anniversary, we should remind ourselves of some of the steps that every investor should take to protect themselves.

If it sounds to go to be true, it probably is. The unraveling of the Madoff Ponzi taught many investors the harsh lesson that if a fund has improbably high returns year after year, it should probably raise a red flag. Every fund, every business, is going to have good and bad years.

Personal relationships are no substitute for due diligence. Knowing someone who runs a fund or company or knowing people that have invested in that fund or company means nothing. Do your due diligence prior to investing and periodically check to see what is being done with your money.

Is your advisor properly registered with all professional and regulatory agencies (i.e., FINRA, SEC, the FPA, NAPFA)? These organizations have publically accessible websites where you can check for registration and complaints, violations, suspensions etc.

Do a media search. Doing a simple Google search for news articles about a person or company can turn up a wealth of information about lawsuits, arrests, and investigations.

Do you understand how the money manager or fund makes its money? If the investment scheme is too obscure, mysterious or complicated for you to understand or if the there is a reluctance to explain the investment scheme in a way that you can understand it, then you should probably move on.

Separate your money from your money manager—is there a custodian holding your account assets? A custodian is a third party firm that holds your investment. When depositing money to an investment account you should always write the check to the custodian, never directly to your money manager.

Are your monthly financial statements consistent? Always review your account statements when they arrive, look particularly closely to any money that is leaving your account. If you don’t understand something, then call or go by your money manager’s office and ask questions until you do.

Review Your Account Online. In addition to your statements, you should also be able to access your account online and view what is happening on a day-to-day basis. Check your accounts periodically and see what trades are being carried out.

Who acts as a check on your investment?

-do you know the accounting firm or auditor?

-are they licensed in your state?

Have you done a nationwide check for criminal and civil litigation records involving the fund and its principals? There are many services that offer this search on the internet, but some states, including New York don’t provide their records to these databases and must be searched on a state by state or even county by county basis. Hiring a firm that specializes in due diligence investigations is probably the best way to go here.

What are other people saying about the fund and its principals? Like the preceding tip, this is difficult to investigate on your own, but it can save you from making a huge mistake. Unless there is an arrest, issues like drug dependency or other erratic behaviors can often be swept under the rug and might not come up in even the most thorough check of criminal or civil records. Doing a reputation check with former employees, co-workers and associates can uncover damaging information for which there is no public record.

There is no way to take the risk out of investing, but by doing your homework and by regularly reviewing your investments, you can mitigate that risk and perhaps protect yourself from losing money to fraud or negligence.